Problem

Smith Manufacturing, Inc. has just learned of a company that complements its product line has become available for sale. Smith is interested in purchasing this company to diversify its product line. Smith's management has asked you to research how it should proceed with the purchase in terms of the accounting treatment. The company would like to see its options on how to account for the purchase of a new company. At this point, there are no negotiations in process, so the values are unknown.

Prepare a letter to Smith Manufacturing's management. In the letter identify some of the concerns you may have regarding the purchase. For example; How are the assets valued? Is there goodwill? Will it be a parent-subsidiary? etc.